Four cities are voting on ballot initiatives that should terrify Coke and Pepsi

Pepsi and Coke might be in a bit of trouble.
Reuters
Four cities are preparing to vote on ballot initiatives that could present a major challenge to big soda.

On November 8, residents of Boulder, Colo. and three cities in the Bay Area — San Francisco, Oakland and Albany, Calif. — will vote on whether or not to implement a tax on sugary drinks.

The California initiatives would tax soda at a rate of 1 cent per ounce. The Boulder tax would be 2 cents per ounce.

A new study from Harvard's T.H. Chan School of Public Health found that the proposed soda taxes would lead to millions of dollars in savings on healthcare costs.

Researchers found that initiatives would result in a nearly 20% drop in soda consumption. The study, which used computer modeling to project the impact of the proposed taxes, also found that a decrease in soda consumption would have a direct effect on the health of the people in the area.

According to the study, the incidence of diabetes in the three California cities would drop an estimated 4% by 2018 when the tax would be in full effect. The study also predicted that 6,000 fewer people in the area would be obese by the end of 2025. In turn, this reduction in rates of obesity and diabetes would cut healthcare costs in the San Francisco Bay Area by $54.9 million over 10 years.

The same study found that the tax in Boulder would cut the incidence of diabetes by an estimated 10% in the city. Healthcare costs would decrease by $6.4 million over 10 years.

San Francisco will vote on whether or not to implement a tax on sugary drinks on November 8.Richard Heyes/flickr

"Our analysis looks beyond revenue and finds that this excise tax on sugary drinks can generate significant prevention of new cases of obesity, diabetes, improved quality adjusted life years and healthcare cost savings," Dr. Steven Gortmaker, a professor of health sociology and lead investigator on the project, said in a statement.

Critics said the study is politically motivated.

"This is a political maneuver financed by out of town special interest groups to push their pro-tax agenda 12 days before an election by looking at only the four cities with ballot initiatives," Laura Kane, a spokesperson for the American Beverage Association, said in a statement. "We encourage the Bay Area and Boulder to look at the facts — taxes on common grocery items don't make people healthier, just poorer."

Few cities in the US that have successfully passed similar taxes.

In Berkeley, Calif., soda consumption in low-income neighborhoods dropped 22% after the city imposed a penny-per-ounce tax on sugar-sweetened beverages, according to a study published in the American Journal of Public Health in August. The city's tax passed in 2014 and went into effect in May 2015.

While taxes likely play a role in deterring consumers, other factors may be at play as well.

"The greater-than-predicted reduction in consumption in Berkeley could also reflect effects of the campaign surrounding the tax, which may have shifted social norms," the study said.

In July, Philadelphia passed a tax of 1.5 cents per ounce of sugar-added and artificially sweetened soft drinks — a tax expected to raise approximately $91 million over the next year.

The American Beverage Association has already spent more than $1.5 million on an anti-tax campaign.AP Photo/Matt Rourke

Big soda's reaction

Unsurprisingly, the soda industry isn't entirely pleased with efforts to turn customers away from sugary beverages. The American Beverage Association, the industry's main lobby group, has already invested millions of dollars to fight laws to tax and label sugary beverages.

As nutritional trends have become increasingly anti-sugar, per capita soda sales have dropped 25% since 1998, but the number of bottles and cans purchased is still rising. So far, soda giants are trying to recoup lost sales in two ways: convincing consumers that sweet sodas are still OK to drink, and investing outside of traditional sugary drinks.

If soda companies want to persuade people to continue to drink soda, they need to cut sugar and calories. The American Beverage Association has an initiative to cut calories from beverages consumed per person by 20% by 2025. Last week, PepsiCo announced that by 2025, two thirds of its drinks will have 100 calories or fewer from added sugar, per 12 oz serving. Currently, these types of sugary beverages make up roughly 40% of PepsiCo's drinks.

One way to do that is by making serving sizes of soda smaller.

In the last quarter, Coke rolled out more new smaller sized packaging in markets including Mexico, India, and China, the company announced on Tuesday. Smaller cans contain fewer total calories than large bottles, which may make them more appealing to consumers. They also generally cost more per ounce.

In 2015, for example, an 8.5-ounce aluminum bottle of Coke generated $1.60 in revenue per purchase, while a two-liter gallon only generated $0.18. That's nearly nine times the revenue.

Persuading people to buy soda in smaller cans isn't enough, though. Increasingly, soda giants are diversifying and investing in healthier options that won't be affected by sugar taxes.

In April, PepsiCo CEO Indra Nooyi announced that less than 25% of the company's global sales are from soda — the same proportion of sales Pepsi brings in from its "naturally nutritious" category, which includes bottled water and unsweetened drinks.

Nooyi calls the emphasis on products aimed at nutritionally-savvy customers "future-proofing" Pepsi's portfolio, "reshaping it to capitalize on consumers' increasing interest in health and wellness."

Coca-Cola is attempting a similar make-over.

The company is working to cut sugar in its sodas globally with lower-sugar recipe revamps. In July, the company rebranded its sugar-free, low-calorie soda Coke Zero as Coca-Cola Zero Sugar in Great Britain. The new brand will roll out in other European markets in the coming quarter.

"Since 2000, we've increased our business from about 10% of our volume coming from still beverages to almost 30% today," COO James Quincey said in a Q&A in July.

These less-sugary options could provide an opportunity for growth, even as governments consider taxing soda on the city, state, and national level. The Berkeley soda study found that when people decreased their soda consumption, they replaced it with healthier choices. Water consumption (bottled or tap) increased 63% in Berkeley after the soda tax went into effect.